How will the HF industry look in the coming years?
I've asked a ton of questions about hedge funds on this forum already, and everyone has been very helpful. NOTE: this question specifically refers to the L/S strategy, even when talking about MM's.
MM's have proven to be able to provide uncorrelated returns on a risk-adjusted basis, especially in comparison to SM's. I think everyone on here will agree that most SM models are not worth paying fees for, and that the top MM's are now the gold standard for the HF industry.
However, as more and more MM's continue to grow, and as more capital flows into them, won't this suck out all the alpha? In other words, if more and more funds have teams covering the same names, how will they continue to produce excess returns? These teams target that 3-5% range as it is, but with more and more teams targeting those same numbers within the same names, all having to hedge downside risk, what will that to their performance?
I've listened to a couple of podcasts on this and people have said it will impact HF's negatively. I guess my questions are:
- what is the growing presence/talent of MM's gonna do to the HF industry?
- in 10-20 years from now, is there still going to be opportunity for there to be rainmakers at MM's (the ones bringing home $30m in good years)?
- Is the MM L/S career path still going to be as attractive as it is today?
I apologize if this is an ignorant question or if it has been discussed before. Thanks everyone
The future of the hedge fund (HF) industry, particularly for long/short (L/S) strategies and multi-managers (MMs), is a hot topic, and your concerns are well-founded. Based on the most helpful WSO content, here’s a breakdown of the key points:
1. Impact of MM Growth on Alpha Generation
2. Barbell Distribution in the Industry
3. Future Opportunities for Rainmakers
4. Attractiveness of the MM L/S Career Path
5. Long-Term Outlook
In summary, while the growing presence of MMs and the influx of capital will create challenges, there will still be opportunities for top talent and innovative strategies to thrive. The key will be staying ahead of the curve in terms of skills, technology, and market insights.
Sources: Hedge Fund Future "Stars" - Where Are They Coming From?, HF Industry Dying?, For love of the game, Hedge Funds v/s Private Equity: Which industry will survive and thrive in the next two decades?
Will be an unpopular opinion on here but $ will flow back to SM L/S. LPs will push back on fees & Trump using endowment taxes as a threat will cause some reallocation away from the 2/3rd tier pods b/c all of the excess return is eaten by ST cap gains. The big 4 will mop up some money but the whatever they can’t absorb will not go to the other pods.
Prob less NYU students in L/S as well as a result. So many of them seem to end up at pods.
big 4 MMs are basically closed to capital anyway
Factor-consciousness and pay-for-alpha mindset will persist, these are advancements in LPs ability to measure performance components & I don’t see it reversing back to “Tommy worked for Bobby who is a legend so give him a couple billion cause he’s smart”. Too many people abused that
That said, there is plenty that can be done in a factor-conscious and idio-alpha centric manner that may not fit in a large platform, such as - smaller niches, strategies with a bit more vol or a bit less sector neutrality, etc.
There are still successful and growing SMs though more (not all) all coming from the platforms & raising on their track record in order to use the tools/mindset learned at platforms but with looser risk limits or perhaps lower fees or lower capacity etc
Alignment has increased, as always the cutting edge will use the best of accumulated tools/knowledge of the industry and either (1) apply those with scale advantages (2) apply then without scale but do something a little different
Any strategy you preferred which sit in the defination of "smaller niches, strategies with a bit more vol or a bit less sector neutrality, etc" if I may ask? Thanks in advance!
There are two sides to the coin.
The success of multi strats is going to attract a lot more people to develop the same skills and enter the industry, and it is going to get more and more competitive to generate alpha. It will be less zero sum between multistrats and other players in markets, and more zero sum with one another, and you will see more dispersion in mulitstrat returns.
On the flip side, I would argue it has also never been harder to be a GP. With pass through fees, gone are the days of collecting a 2% management fee for asset gathering and riding beta, and all the major platforms are offering something identical to talent so they are essentially in perfect competition with one another. Since I started in this industry, pretty much every year payouts / deals for PMs have gotten better, as more of the economics has been transferred from the GP (and LPs) to talent, and I see no sign of that stopping.
So I suspect the job gets (even) harder, but the pay continues to get better for the folks actually generating alpha.
Will the pod shops remain attractive for systematic trading where you literally waste 12 months building/duplicating the same stuff which 30-40 other teams are doing? Isn't that a huge waste of man power, like reinventing the wheel? And how can 5-6 person pod build cutting edge tech and compete with the likes of collaborative shops like Qube, or Jump, JS, HRT which are increasingly getting into MFT? Would love to hear thoughts on this.
yeh imo pod model is not ideal for quant (esp anything close to high freq)
you just cannot compete with centralised firms infra and collective efforts with a 5 man pod
in say equities or fixed income the pod model works as for an individual pod they really don’t need much from the firm - the alpha is all discretionary
even prop shops with siloed pods like Tower and Jump have much bigger pods - n >=25 and mean probably around 50 and get a lot more central tech compared to M/P/B
Centralized data/infra teams at MM platforms, along with AI, can dramatically reduce buildout costs for commoditized components, though I have yet to see this well implemented.
Meanwhile the collaborative firms will always have a talent retention problem. How do you retain your best people, who have seen your core signals, when they can just hop to a pod and collect 20%+ of P&L? For example the Jane Street options team that Millennium poached - in many ways, prop shops have become the new training grounds for talent for MMs to raid.
The MFT teams at prop shops I've seen are also extremely bloated relative to P&L and the economics get cut too many different ways. For many strategies, you end up overpaying for infrastructure that is not high value add enough to justify cost, and you can capture the 80/20 with a fifth as many people.
There is a trend to offshore a lot of this. As noted above prop pods are much bigger than fundamental/macro pods and need a lot of SWE/ops staff, for whom US wages are 4-5x any other country. The firms may not cover base salaries/benefits (there is no pass-through fee that clients pay) and charge all labor and infra expenses to the pod.
The "collaborative" teams keep people by not being so collaborative, and making sure nobody knows how the full strategy works. The JS guy was a rare exception.
Ok, let me stir things up a little. This is just an opinion. But I think recruiting and identifying talent has the potential to change in the near future which means the distribution of hedge fund types would change drastically too. If you compare recruiting across industries, right now it’s very hand wavy. We are in a Cold War era right now in finance. Where big firms operate in this spy vs spy approach to identify talent. Other firms with less resources can’t compete with them. Which sucks for most people here, because it adds a bit of luck to our career path. A mechanical engineer applying to GM would go through a few hours of interviews to assess skills. But a baseball player doesn’t do this, they have proven their skills in public. I think asset managers are closer to baseball players than a typical employee like engineers when it comes to allocating funds or a seat. Once you prove your skills, you basically proves your “at base percentage”. If any asset managers in the world can do this, then we change from this interview spy vs spy approach to baseball based recruiting with contracts that now are more fairer for the asset manager. Anyway, that’s my two cents and what I am working on now too.
I think you mean "on base percentage", unless you're referring to batting average?
Sunt eligendi illum autem hic repellendus qui. Velit molestias enim est dolor animi sed et. Natus autem dolores dolor.
Alias debitis praesentium quidem laboriosam. Eum ab itaque libero architecto error nulla aut.
Nam libero non quaerat et. Qui et temporibus amet cum perferendis omnis consectetur. Et ratione aut qui mollitia accusantium natus. Optio ut qui minima rerum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...